Magazine

Home Loans with Bells and Whistles

July 13, 2003

If you're shopping for a mortgage -- and with interest rates at a 45-year low, who isn't? -- there are some new twists to consider on the standard 30- and 15-year loans. For example, you can get a loan that allows you to skip payments. And a new portable mortgage locks in today's low rates -- not just for this house but for the next one, too.

You'll pay for these perks, however. Some lenders charge extra fees, while others jack up your interest rate a bit. If you examine them closely, you may discover you'll come out ahead with conventional loans.

THE PORTABLE LOAN

E*Trade (ET) new Mortgage on the Move offers a unique solution: It allows you to take your interest rate and the balance on your current mortgage to your next home. That's a neat feature if you think you'll be moving in a few years and want to lock in today's low rates. (The loan isn't available to refinancers nor to those making downpayments of less than 20% of the purchase price.) You can transfer the mortgage only once. If you need additional funds to finance your next home, E*Trade will underwrite a new loan at the going rate on a regular mortgage.

The catch is the interest rate. E*Trade adds about 0.6% to the fixed rate on a conventional 30-year loan. As a result, you'll pay about 6% today, vs. 5.4% for a regular mortgage. If you have a $300,000 mortgage, portability adds $114 to your monthly payment.

Move ahead five years, and the portable loan will have cost you about $9,000 more in interest than a regular loan at 5.4%, calculates Keith Gumbinger, vice-president at mortgage-tracking firm HSH Associates in Butler, N.J. Assuming you move then, and interest rates on regular loans are at 6.5%, you'll have to hold onto the portable loan for five more years before you recoup that extra $9,000, vs. a new loan at 6.5%.

If you know you're going to move, another solution is a mortgage that offers a fixed rate for a set period, such as three, five, or seven years, and floats afterwards. For example, you can now lock in 4.28% for five years. Someone with a $300,000 mortgage would save about $320 a month at that rate vs. paying 6% for the portable loan.

HOME EQUITY/MORTGAGE COMBO

Another new twist on a mortgage automatically converts your downpayment into a home-equity line of credit. One such offering, from Wells Fargo (WFC), increases your credit line quarterly as you pay down principal and annually to reflect any increase in your home's value. (If your home's value falls, the line remains the same.)

Although this combo saves on paperwork, you can probably do better with separate loans. That's because if your credit line's balance is $20,000 or below -- or if you opt not to activate the line -- you'll pay Wells Fargo a $75 annual fee. Not all home equity lines charge fees. Moreover, the credit line's variable rate, currently 4.5%, is slightly above Wells Fargo's prime lending rate. Some lenders now offer rates of up to a half point below prime, says Gumbinger. If you want to lock in a fixed rate on your credit line, Wells allows you to convert some or all of it to a home-equity loan for a $50 fee. But the current rate, 7.375%, is slightly above the national average, Gumbinger says.

DEFERRED PAYMENT OPTION

Finally, if you're worried about a layoff or just need to skip a payment now and then, a loan available through a limited number of Fannie Mae-approved lenders allows you to defer two payments a year and 10 over the life of a 30-year loan.

You'll pay a fee for these loans, which go by names such as PaymentPower. A lender offering this product, Countrywide Home Loans, lets you pay either about 0.5% to 0.75% of your whole mortgage up front to skip all 10 payments, or about 0.25% to 0.375% up front plus a charge of $100 to $230 each time you want to skip. The up-front charge can change daily. A cheaper alternative now is to borrow on a home-equity line of credit at about 5%. On a $2,000 monthly mortgage payment, interest would run about $8.33 a month. Of course, since rates change, so will your payment. But even if rates rise, you're better off borrowing to cover a payment rather than paying to stop it. By Anne Tergesen